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The federal government’s stubbornness not to make Canadians pay the GST on their Netflix subscription is hindering any progress on the much greater problem of GST collection by foreign digital service companies.

Recently, there has been much ado about Netflix: whether it should be regulated or taxed and whether it is destroying Canadian content production or it is a new global platform that will export Canadian content to the world. The federal government recently touted an agreement with the company for a $500 million investment in Canadian content over five years alongside a “first ever” strategy for the Canadian creative economy.

The Quebec legislature swiftly and unanimously voted for a motion to “ensure the Quebec sales tax is imposed on all foreign companies that offer products and services online, notably in the cultural sector, as soon as possible.” However, Quebec Finance Minister Carlos Leitao said the province won’t take any steps in that direction before knowing Ottawa’s position.

The debate about digital content providers and taxes has become very focused on Netflix and Canadian broadcasting rules.

This focus is too narrow and misses the real issue.

Foreign providers of digital products and services, including ebooks, games, streaming services like Spotify and Netflix, and marketplace platform operators have a competitive advantage over Canadian companies because they are not obligated to collect and remit GST/HST on behalf of consumers.

Just because foreign companies aren’t collecting these taxes, doesn’t mean the services aren’t taxable. Under current tax law, it is the consumer’s responsibility to report their imports of intangible services and pay the appropriate taxes on them.

Unsurprisingly, not very many consumers do this. Only 410 returns on “imported taxable supplies” were filed by consumers and small suppliers in 2015, bringing in $3.2 million in tax revenue. This doesn’t come close to a realistic total — if Netflix alone were to collect and remit GST/HST, Canadian governments would receive about $50 million annually.

The federal government has been clear, that it will not require foreign-based streaming services like Netflix to collect the GST on their subscriptions sold in Canada. This is unfortunate, because the tax policy implications are much broader than Netflix alone.

Foreign service providers do not pay sales taxes, Canadian consumers do. And although online services and products bought from foreign vendors are already taxable, Canadian consumers will not realistically go through the administrative hassle of paying the tax voluntarily unless the foreign vendors collect the tax for them.

What is needed is a broader policy in Canada requiring foreign suppliers of online services to collect sales tax on behalf of consumers. But the federal government’s stubbornness not to make Canadians pay the GST on their Netflix subscription is hindering any progress on the much greater problem of GST collection by foreign digital service companies.

In contrast, Quebec’s motion to impose the obligation to collect provincial sales tax on companies that provide products and services online to charge and remit the provincial sales tax is actually sound policy. It would level the competitive playing field for domestic and foreign companies and is in line with the international consensus on sales tax for the digital economy.

The European Union, Norway, Australia, Japan, South Korea, South Africa and other countries have already moved to correct the competitive disparity between foreign and domestic providers of digital services within their own borders.

The reason foreign providers of digital services are not obligated to collect sales tax stems from the (lack of a) definition for “carrying on business” in The Excise Tax Act. If a business is “carrying on,” it must register for, collect and remit GST/HST. Canadian policy determines whether or not business is “carrying on” based on the location of the supplier. The tax advantage that foreign companies enjoy could be fixed by making the obligation to register for GST/HST purposes based on the location of consumers.

If the policy intent is to exempt Netflix from the list of taxable services, then it could do so easily and directly in the GST legislation. The Federal government could then spend time and efforts on effectively addressing the tax advantage of all digital foreign companies by actually changing its policy.

I applaud Quebec for attempting to address the broader issue of cross-border trade of intangible goods and services. Many countries are already employing policies that balance coverage of the digital economy and the reporting requirements they impose on foreign businesses.

Canada should learn from these policies and implement changes to work with our existing regulations. Delaying policy changes only prolongs the disadvantages that Canadian businesses face within their own borders and leaves tax revenue on the table at the expense of the Canadian economy.

Rosalie Wyonch is a policy analyst at the C.D. Howe Institute.

Published in the Toronto Star.

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